Support

A cookie is a piece of data stored by your browser or device that helps websites like this one recognize return visitors. We use cookies to give you the best experience on BNA.com. Some cookies are also necessary for the technical operation of our website. If you continue browsing, you agree to this site’s use of cookies.

Mexico Balking at Deductions for Foreign-Owned Intangibles

Nov. 25 — Mexico needs more legal clarity on the kinds of deductions allowed for promoting and
advertising businesses with a related foreign-owned trademark, according to tax practitioners
who said the ambiguity has resulted in conflicts with the tax authorities.

The country’s tax authority, the Servicio de Administracion Tributaria (SAT), is starting
to take a more aggressive approach toward disallowing many of these expenses for intangibles
between related parties, said Moises Curiel, a Mexico City-based tax partner and transfer
pricing practitioner with Baker & McKenzie.

“I have several clients who are being audited by the Ministry of Finance, who are
challenging the total amount of marketing and promotional expenses as not deductible,
arguing that they belong to the owner and not the Mexican affiliate,” Curiel told
Bloomberg BNA earlier this month.

The controversy over accounting for intangibles has heated up, with tax authorities
challenging previously deductible promotional expenses in the financial, pharmaceutical,
telecommunications and food and beverage sectors, tax practitioners said.

“It is a position that the SAT has expressed for two years, probably as a consequence
of the weak finances of the country and the low oil prices,”
said Guillermo Villasenor, a tax partner with Mexico City-based Sanchez Devanny. “We
have been seeing a more aggressive perspective on changing some of the interpretations
they gave us previously.”

No Mexican Guidance

At the heart of the contention is whether the tax authorities have the legal right
to disallow promotional expenses on the basis that they are actually marketing expenses
for the brand itself, increasing the value of the brand owned by the foreign parent
company and for which the subsidiary pays a royalty.

“There are no legal provisions or guidelines on this topic in Mexico at this point,”
said Jorge Ramirez-Dorantes, a Mexico City-based tax partner with Baker & McKenzie.
“It is very complex and the SAT position goes to the extreme position, saying that
all the expenses a subsidiary makes are designed to increase the value of the brand.”

The battle over how deductions are treated for intangibles between a foreign headquarters
and its local subsidiary is one that has been fought internationally. In 2002, for
example, the U.S. Court of Appeals for the Ninth Circuit in a case involving the sale
of U.S.-based DHL Corp.'s trademark to a foreign affiliate established a bright-line
test for what could be considered reasonable marketing expenses for the brand development
and what could be deducted as a promotional expense for a specific product.

The Mexican tax authorities are hoping to find a similar benchmark or industry standard
for reasonable percentage of marketing and promotion expenses, according to Charikleia
Tsoukia, a member of the International Fiscal Association. IFA has been working with
the Mexican tax authorities to provide insights on industry benchmarks and guidelines
on possible benchmarks by sector.

“I think in their minds they were trying to see if those benchmarks could result in
a bright-line text,” said Tsoukia, a Mexico City-based transfer pricing and tax partner
at Ernst & Young. “It might be a tool that they could start their audits from, but
it would still be a negotiable process,” she told Bloomberg BNA Nov. 22.

Marketing Versus Promotion

Accounting firms and tax attorneys in Mexico also are calling for this kind of clarity
from the tax authorities in what should be considered a marketing expense related
to building up the trademark value and what is a promotional expense, something potentially
deductible for the subsidiary as a cost of promoting a product in the country.

“We still need to wait for the tax authorities to reach a final conclusion on this,”
said Teresa Quinones, a Mexico City-based tax partner with KPMG. “What we are seeking
more clarity on is having an appropriate understanding of what those marketing expenses
versus promotional expenses are and the tax consequences of having those expenses.”

An alternative approach that more closely paints the economic reality, according to
Quinones, would involve an analysis of which party is entitled to the profit of the
intangible, based on the party that developed and enhanced it and is responsible for
its maintenance, protection and exploitation.

“Marketing expenses might imply the existence of a local intangible, but you need
to do an appropriate analysis to see whether you are entitled to the whole ownership
of the local intangible,” Quinones said. “It is a complex analysis that includes additional
factors.”

The variance between sectors and even within a sector may also make a bright-line
test more challenging.

“With the data we gathered, we found that it is very difficult to promote a bright-line
test because each industry is different,” Tsoukia said. “And companies are all over
the place in terms of how much they spend—I honestly cannot find a reliable statistical
pattern that each industry follows.”

SAT Asks IFA to Weigh In

The Mexican tax authorities, in turn, have indicated they may provide more guidance
on the topic. The SAT has requested a professional opinion on the treatment of marketing
intangibles from IFA’s Mexican branch, and these comments are under discussion, Quinones
said. The comments are expected to be made public in the coming weeks.

The Mexican Supreme Court is also expected to rule on several specific tax cases involving
the treatment of marketing and promotion expenses for the marketing of an intangible.

Rodrigo Gomez, a Mexico City-based tax partner at Jones Day, warned, however, that
companies transferring an intangible to a foreign parent as a means to then deduct
marketing expenses in Mexico shouldn’t consider themselves eligible to make the same
deductions as other subsidiaries that are freshly trying to establish their brand
for the first time in the country.

“A lot of taxpayers were migrating all the intangibles to Europe or Luxembourg. That
is how this issue came into the eyes of the authorities,” he said. “In those cases,
whatever expenses are related to that intangible, it is not a defendable deduction,
because the intangible was created in Mexico, so there is no reason why it should
go outside.”

All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to books@bna.com.

Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)

Notify me when updates are available (No standing order will be created).

This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to research@bna.com.

Put me on standing order

Notify me when new releases are available (no standing order will be created)